Mineralys Therapeutics, Inc. 10-K

Item 8. Financial Statements and Supplementary Data Mineralys Therapeutics, Inc. Financial Statements Index Report of Independent Registered Public Accounting Firm (PCAOB ID 42) F- 2 Balance Sheets as of December 31, 2022 and 2021 F- 3 Statements of Operations for the Years Ended December 31, 2022 and 2021 F- 4 Statements of Convertible Preferred Stock and Stockholders’ Deficit for the Years Ended December 31, 2022 and 2021 F- 5 Statements of Cash Flows for the Years Ended December 31, 2022 and 2021 F- 6 Notes to Financial Statements F- 7 F-1 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Mineralys Therapeutics, Inc. Opinion We have audited the financial statements of Mineralys Therapeutics, Inc. (the Company), which comprise the balance sheets as of December 31, 2022 and 2021, and the related statements of operations, changes in convertible preferred stock and stockholders’ deficit, and cash flows for the years then ended, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Ernst & Young LLP March 15, 2023 We have served as the Company’s auditor since 2022 Denver, Colorado F-2 Mineralys Therapeutics, Inc. Balance Sheets (in thousands, except share and per share amounts) December 31, 2022 2021 Assets Current assets: Cash and cash equivalents $ 87,701 $ 10,612 Marketable securities 22,409 — Prepaid and other current assets 2,701 510 Total current assets 112,811 11,122 Other assets 1,631 3 Total assets $ 114,442 $ 11,125 Liabilities, convertible preferred stock, and stockholders’ deficit Current liabilities: Accounts payable $ 1,907 $ 763 Accrued liabilities 6,160 4,291 Total current liabilities 8,067 5,054 Commitments and contingencies (Note 4) Series A convertible preferred stock, $0.0001 par value, 86,332,216 and 86,340,911 shares authorized and 86,332,216 and 61,180,259 shares issued and outstanding as of December 31, 2022 and 2021, respectively, $41,180 and $29,184 aggregate liquidation preference as of December 31, 2022 and 2021, respectively 40,987 28,996 Series B convertible preferred stock, $0.0001 par value, 136,510,868 and 0 shares authorized and 136,510,868 and 0 shares issued and outstanding as of December 31, 2022 and 2021, respectively, $118,000 and $0 aggregate liquidation preference as of December 31, 2022 and 2021, respectively 117,657 — Stockholders’ deficit: Common stock, $0.0001 par value, 319,000,000 and 166,000,000 shares authorized and 6,419,238 and 5,441,980 shares issued and outstanding as of December 31, 2022 and 2021, respectively 1 1 Additional paid-in capital 540 85 Accumulated deficit (52,810) (23,011) Total stockholders’ deficit (52,269) (22,925) Total liabilities, convertible preferred stock, and stockholders’ deficit $ 114,442 $ 11,125 The accompanying notes are an integral part of these financial statements. F-3 Mineralys Therapeutics, Inc. Statements of Operations (in thousands, except share and per share data) Year Ended December 31, 2022 2021 Operating expenses: Research and development $ 26,250 $ 16,308 General and administrative 5,229 2,417 Total operating expenses 31,479 18,725 Loss from operations (31,479) (18,725) Other income (expense): Interest income (expense), net 1,676 (27) Change in fair value of convertible notes — (657) Other income 4 1 Total other income (expense), net 1,680 (683) Net loss $ (29,799) $ (19,408) Net loss per share attributable to common stockholders, basic and diluted $ (5.77) $ (3.89) Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted 5,167,296 4,984,286 The accompanying notes are an integral part of these financial statements. F-4 Mineralys Therapeutics, Inc. Statements of Convertible Preferred Stock and Stockholders’ Deficit (in thousands, except share data) Series A Convertible Preferred Stock Series B Convertible Preferred Stock Common Stock Additional Paid-In-Capital Accumulated Deficit Total Stockholders’ Deficit Shares Amount Shares Amount Shares Amount Balance as of December 31, 2020 — $ — — $ — 5,411,877 $ 1 $ 5 $ (3,603) $ (3,597) Issuance of Series A convertible preferred stock, net of issuance costs of $188 50,311,827 23,812 — — — — — — — Issuance of Series A convertible preferred stock upon conversion of convertible notes 10,868,432 5,184 — — — — — — — Issuance of restricted stock awards — — — — 30,103 — — — — Stock-based compensation — — — — — — 80 — 80 Net loss — — — — — — — (19,408) (19,408) Balance as of December 31, 2021 61,180,259 28,996 — — 5,441,980 1 85 (23,011) (22,925) Issuance of Series A convertible preferred stock, net of issuance costs of $7 25,151,957 11,991 — — — — — — — Issuance of Series B convertible preferred stock, net of issuance costs of $343 — — 136,510,868 117,657 — — — — — Issuance of restricted stock awards — — — — 977,258 — — — — Stock-based compensation — — — — — — 455 — 455 Net loss — — — — — — — (29,799) (29,799) Balance as of December 31, 2022 86,332,216 $ 40,987 136,510,868 $ 117,657 6,419,238 $ 1 $ 540 $ (52,810) $ (52,269) The accompanying notes are an integral part of these financial statements. F-5 Mineralys Therapeutics, Inc. Statements of Cash Flows (in thousands) Year Ended December 31, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (29,799) $ (19,408) Adjustments to reconcile net loss to net cash used in operating activities: Accretion of discount on held-to-maturity securities (649) — Stock-based compensation 455 80 Change in fair value of convertible notes — 657 Non-cash interest expense — 27 Changes in operating assets and liabilities: Prepaid and other current assets (2,240) (386) Accounts payable and accrued liabilities 3,012 4,471 Net cash used in operating activities (29,221) (14,559) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of marketable securities (71,759) — Maturity of marketable securities 50,000 — Net cash used in investing activities (21,759) — CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the issuance of Series A convertible preferred stock, net of offering costs 11,991 23,812 Proceeds from the issuance of Series B convertible preferred stock, net of offering costs 117,657 — Deferred offering costs (1,629) — Net cash provided by financing activities 128,019 23,812 Net increase in cash, cash equivalents, and restricted cash 77,039 9,253 Cash, cash equivalents, and restricted cash - beginning 10,662 1,409 Cash, cash equivalents, and restricted cash - ending (1) $ 87,701 $ 10,662 Supplement Disclosure of Non-Cash Financing Activities: Deferred offering costs included in accounts payable and accrued liabilities $ 360 $ — Conversion of convertible notes and accrued interest to Series A convertible preferred stock $ — $ 5,184 (1) Cash and cash equivalents as of December 31, 2022 exclude marketable securities of $22.4 million. Cash, cash equivalents, and marketable securities amounted to $110.1 million as of December 31, 2022. The accompanying notes are an integral part of these financial statements. F-6 Mineralys Therapeutics, Inc. Notes to Financial Statements Note 1. Nature of Business Mineralys Therapeutics, Inc. (the Company) is a clinical-stage biopharmaceutical company focused on developing medicines to target diseases driven by abnormally elevated aldosterone. The Company’s clinical-stage product candidate, lorundrostat, is a proprietary, orally administered, highly selective aldosterone synthase inhibitor that the Company is initially developing for the treatment of patients with uncontrolled or resistant hypertension. The Company has completed a Phase 2 proof-of-concept study of lorundrostat for the treatment of uncontrolled or resistant hypertension and has plans for the continued research and development of lorundrostat in hypertension and other potential indications. The Company was incorporated as a Delaware corporation in May 2019, and it is headquartered in Radnor, Pennsylvania. The Company’s operations to date have been limited to business planning, raising capital, in-licensing lorundrostat, conducting preclinical and clinical trials, and other research and development. Reverse Stock Split On February 1, 2023, the Company effected a one-for-10.798 reverse stock split of its issued and outstanding shares of common stock, par value $0.0001 per share, and a proportional adjustment to the existing conversion ratio of the Company’s preferred stock (the Reverse Stock Split). Accordingly, all share and per-share amounts for all periods presented in the accompanying financial statements and notes thereto have been adjusted to reflect this Reverse Stock Split. Liquidity and Capital Resources Since inception, the Company has not generated any revenue from product sales or other sources and has incurred significant operating losses and negative cash flows from operations. The Company’s primary uses of cash to date have been to fund research and development activities, business planning, establishing and maintaining the Company’s intellectual property portfolio, hiring personnel, raising capital, and providing general and administrative support for these operations. As of December 31, 2022, the Company had an accumulated deficit of $52.8 million and cash, cash equivalents, and marketable securities of $110.1 million. For the year ended December 31, 2022, the Company had a net loss of $29.8 million and net cash used in operating activities of $29.2 million. From inception to December 31, 2022 the Company has funded its operations by raising aggregate gross proceeds of approximately $158.0 million from the sale of the Company’s convertible preferred stock and convertible notes. The Company has a limited operating history, and the sales and income potential of its business is unproven. The Company expects to continue to incur substantial losses in the foreseeable future as a result of the Company’s research and development activities. Additional funding will be required in the future to continue with the Company’s planned research and development and other activities. The Company expects to finance its operations through equity offerings, including the IPO that occurred subsequent to December 31, 2022 described in Note 9. “ Subsequent Events ,” debt financings, and other capital sources, including potential strategic collaborations, licensing, and other similar arrangements. However, there can be no assurance that any additional financing or strategic transactions will be available to the Company on acceptable terms, if at all. If events or circumstances occur such that the Company does not obtain additional funding, it may need to delay, reduce, or eliminate its product development or future commercialization efforts, which could have a material adverse effect on the Company’s business and results of operations or financial condition. The Company believes that its existing cash, cash equivalents, and marketable securities as of December 31, 2022, combined with the cash proceeds received from the sale of the Company’s common stock in the IPO that occurred subsequent to December 31, 2022 described in Note 9. “ Subsequent Events ,” will be sufficient to allow the Company to fund operations for at least one year from the issuance date of these financial statements. Note 2. Summary of Significant Accounting Policies Basis of Presentation The financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP), which include all adjustments necessary for the fair presentation of the Company’s financial position, results of operations, and cash flows for the periods presented. Any reference in these notes to applicable guidance is meant to refer to the authoritative U.S. GAAP as found in the Accounting Standards Codification (ASC) and Accounting Standards Updates of the Financial Accounting Standards Board (FASB). The Company’s management performed an evaluation of its activities through the date of filing of these financial statements and concluded that there are no subsequent events requiring disclosure, other than as disclosed. F-7 Mineralys Therapeutics, Inc. Notes to Financial Statements Emerging Growth Company Status The Company is an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act (JOBS Act), and may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. The Company may take advantage of these exemptions until the last day of the fiscal year following the fifth anniversary of its initial public offering or such earlier time as the Company is no longer an “emerging growth company.” Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. The Company has elected to use the extended transition period for complying with new or revised accounting standards and as a result of this election, its financial statements may not be comparable to companies that comply with public company effective dates. The Company may take advantage of these exemptions up until the last day of the fiscal year following the fifth anniversary of its initial public offering or such earlier time that it is no longer an “emerging growth company.” Segment Information The Company operates in one operating segment for the purposes of assessing performance and making operating decisions and, accordingly, no segment disclosures have been presented herein. All assets are held in the United States. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Estimates are used in the following areas, among others: research and development accruals, fair value of convertible notes, fair value of the Company’s common stock, and income taxes. Cash, Cash Equivalents, and Restricted Cash As of December 31, 2021, the Company had $50 thousand classified as restricted cash for the required collateral for a credit card facility with Silicon Valley Bank. As of December 31, 2022, the Company did not have any restricted cash balances. The following table provides a reconciliation of cash, cash equivalents, and restricted cash as reported in the statement of cash flows to the balance sheets (in thousands): December 31, 2022 2021 Cash $ 2,872 $ 10,612 Money market securities 84,829 — Total cash and cash equivalents 87,701 10,612 Restricted cash, as a component of prepaid and other current assets — 50 Total $ 87,701 $ 10,662 Concentration of Credit Risk The Company has no significant off-balance sheet concentrations of credit risk, such as foreign currency exchange contracts, option contracts, or other hedging arrangements. Financial instruments that potentially subject the Company to concentrations of credit risk primarily consist of cash balances in several accounts with two financial institutions which, from time to time, are in excess of federally insured limits. Risks and Uncertainties The Company has not yet generated any revenue from the sale of its products and is subject to all of the risks and uncertainties that are typically faced by biopharmaceutical companies that devote substantially all of their efforts to F-8 Mineralys Therapeutics, Inc. Notes to Financial Statements research and development and clinical trials and do not yet have commercial products. The Company expects to continue incurring losses for the foreseeable future. Fair Value Measurements The Company is required to disclose information on all assets and liabilities reported at fair value that enables an assessment of the inputs used in determining the reported fair values. ASC Topic 820, Fair Value Measurement, establishes a hierarchy of inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances. The fair value hierarchy applies only to the valuation inputs used in determining the reported fair value and is not a measure of the investment credit quality. The three levels of the fair value hierarchy are described below: • Level 1 – quoted prices in active markets for identical assets and liabilities • Level 2 – other significant observable inputs (including quoted prices for similar assets and liabilities, interest rates, credit risk, etc.) • Level 3 – significant unobservable inputs (including the Company’s own assumptions in determining the fair value of assets and liabilities) For certain financial instruments, including cash and restricted cash, prepaid expenses, accounts payable, and certain accrued liabilities, the recorded amount approximates estimated fair value due to their relatively short maturity period. Refer to Note 3. “ Fair Value of Financial Instruments ” for additional details of the Company’s financial instruments. Marketable Securities The Company generally invests its excess cash in money market funds and investment-grade short-term fixed-income securities, such as U.S. Treasury bills. Such investments are included in cash and cash equivalents and marketable securities in the balance sheets. The Company determines the appropriate classification of short-term and long-term securities at the time of purchase and re-evaluates such designation as of each balance sheet date. Securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are carried at amortized cost, adjusted for the accretion of discounts using the interest method. For held-to-maturity investments, the Company periodically reviews each individual security position that has an unrealized loss, or impairment, to determine if that impairment is other-than-temporary. If the Company believes an impairment of a security position is other than temporary, based on available quantitative and qualitative information as of the report date, the loss will be recognized as other income (expense), net, in the Company’s statements of operations and a new cost basis in the investment is established. The Company began investing in marketable securities during the year ended December 31, 2022, and no impairment charges were recorded. Deferred Offering Costs The Company capitalizes certain legal, professional, accounting, and other third-party fees that are directly associated with in-process equity issuances as deferred offering costs until such equity issuances are consummated. After consummation of the equity issuance, these costs are recorded as a reduction in the capitalized amount associated with the equity issuance. Should the equity issuance be abandoned, the deferred offering costs are expensed immediately as a charge to operating expenses in the statement of operations. Deferred offering costs as of December 31, 2022 and 2021 were $1.6 million and $3 thousand, respectively. Such costs are classified in other assets on the balance sheets. Convertible Preferred Stock The Company records convertible preferred stock at fair value on the dates of issuance, net of issuance costs. Upon the occurrence of certain events that are outside the Company’s control, including a deemed liquidation event, F-9 Mineralys Therapeutics, Inc. Notes to Financial Statements holders of the convertible preferred stock can cause redemption for cash. Therefore, the convertible preferred stock is classified outside of stockholders’ deficit on the balance sheets as events triggering the redemption for cash are not solely within the Company’s control. The carrying values of the convertible preferred stock are adjusted to their liquidation preferences if and when it becomes probable that such a liquidation event will occur. Subsequent to December 31, 2022, the Company’s convertible preferred stock converted into shares of the Company’s common stock of which carrying value at the date of conversion was converted to permanent equity, which is described in more detail in Note 9. “ Subsequent Events .” Research and Development Expenses Research and development costs, both internal and external, are expensed as incurred. Costs are considered incurred based on an evaluation of the progress to completion of specific tasks under each contract using information and data provided to the Company by its clinical sites and vendors. These costs consist of direct and indirect costs associated with specific projects, as well as fees paid to various entities that perform certain research on behalf of the Company. The Company’s research and development expenses consist primarily of clinical trial expenses, consulting costs and employee-related costs, and costs associated with required regulatory filings, licenses, and fees. Non-refundable advance payments for goods and services that will be used in future research and development activities are capitalized and recorded as expense in the period that the Company receives the goods or when services are performed. Assets acquired (or in-licensed) that are utilized in research and development that have no alternative future use are expensed as incurred. Commitments and Contingencies From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of business. The Company accrues a liability for such matters when it is probable that future expenditures will be made and can be reasonably estimated. The Company expects that contingencies related to regulatory approval milestones will only become probable once such regulatory outcome is achieved. Stock-Based Compensation The Company accounts for its stock-based compensation awards in accordance with ASC Topic 718, Compensation – Stock Compensation (ASC 718). ASC 718 requires all stock-based payments to employees, including grants of employee stock options, to be recognized in the statements of operations based on their fair values. The Company’s stock-based awards are subject only to service-based vesting conditions. The Company measures restricted common stock awards using the difference, if any, between the purchase price per share of the award and the fair value of the Company’s common stock at the date of the grant. The Company estimates the fair value of its stock option awards using the Black-Scholes option pricing model, which requires the input of assumptions, including (i) the expected stock price volatility, (ii) the calculation of expected term of the award, (iii) the risk-free interest rate, and (iv) expected dividends. The Company accounts for forfeitures as they occur. As of December 31, 2022, the Company’s common stock was privately held, and there was no active trading market for the Company’s common stock. Therefore, the Company based its estimate of expected volatility on the historical volatility of a group of similar publicly-traded companies. The Company believes that the companies in the group have characteristics similar to its own characteristics, including stage of product development and a focus on the life sciences industry. The Company believes the group selected has sufficient similar economic and industry characteristics and includes companies that are most representative of the Company. The Company used the simplified method to calculate the expected term, as it did not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term for options granted and utilized the contractual term for options granted. The risk-free interest rate was based on a treasury instrument whose term was consistent with the expected life of the stock options. As of December 31, 2022, there was no public market for the Company’s common stock, and the Company determined the fair value of the shares of its common stock underlying its share-based awards by considering a number of objective and subjective factors, including third-party valuations of the Company’s common stock, the valuation of comparable companies, the Company’s operating and financial performance, and general and industry-specific economic outlook, amongst other factors. The assumptions underlying these valuations represented management’s best estimate, with the assistance of a third-party valuation specialist, which involved inherent uncertainties and the application of F-10 Mineralys Therapeutics, Inc. Notes to Financial Statements management’s judgment. As a result, if the Company had used different assumptions or estimates, the fair value of the Company’s common stock and its stock-based compensation expense could have been materially different. Compensation expense related to awards is recognized on a straight-line basis by recognizing the grant date fair value over the associated service period of the award, which is generally the vesting term. Net Loss Per Share The Company’s basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period. The diluted net loss per share attributable to common stockholders is computed by giving effect to all potential common stock equivalents outstanding for the period determined using the treasury stock method. For purposes of this calculation, convertible preferred stock and stock options to purchase common stock are considered to be common stock equivalents but have been excluded from the calculation of diluted net loss per share attributable to common stockholders as their effect is anti-dilutive. The following table sets forth the potential common shares excluded from the calculation of net loss per common share because their inclusion would be anti-dilutive: Year Ended December 31, 2022 2021 Convertible preferred stock (as converted into common stock) 20,637,415 5,665,881 Outstanding options 1,365,442 527,387 Unvested restricted stock awards 1,199,136 337,639 Total 23,201,993 6,530,907 Income Taxes Income taxes are recorded in accordance with ASC Topic 740, Income Taxes (ASC 740), which provides for deferred taxes using an asset and liability approach. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities and for loss and credit carryforwards using enacted tax rates anticipated to be in effect for the year in which the differences are expected to reverse. Valuation allowances are provided if, based upon the weight of available evidence, it is more likely than not that some or all the deferred tax assets will not be realized. The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740. When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that some or all the benefit will more likely than not be realized. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position, as well as consideration of the available facts and circumstances. As of December 31, 2022 and 2021, the Company does not have any significant uncertain tax positions. If the Company were to incur interest and penalties on uncertain tax positions, it would classify them as income tax expense. Recently Issued Accounting Pronouncements From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes the impact of recently issued standards that are not yet effective will not have a material impact on its financial position or results of operations upon adoption. F-11 Mineralys Therapeutics, Inc. Notes to Financial Statements Note 3. Fair Value of Financial Instruments There were no financial instruments measured at fair value on a recurring basis based on the fair value hierarchy as of December 31, 2021, and the following table presents this information as of December 31, 2022 (in thousands): December 31, 2022 Level 1 Assets Cash equivalents Money market funds $ 84,829 There were no transfers within the fair value hierarchy during the periods presented. The following methods and assumptions were used by the Company in estimating the fair values of each class of financial instrument disclosed herein: Money Market Funds—The carrying amounts of money market funds reported as cash and cash equivalents in the balance sheets approximate their fair values due to their short-term nature. The fair values of money market funds are determined by Level 1 inputs utilizing quoted prices (unadjusted) in active markets for identical assets. U.S. Treasury Bills—As of December 31, 2022, the Company had $22.4 million of short-term U.S. Treasury bills with original maturities between three and six months. Fair values of these investments are determined by Level 2 inputs utilizing quoted prices (unadjusted) in active markets for similar assets. As of December 31, 2022, held-to-maturity securities had an amortized cost of $22.4 million reported as marketable securities in the balance sheet and fair value of $22.4 million. Convertible Notes - Related Party—Between May 2019 to July 2020, the Company issued unsecured convertible promissory notes in the aggregate principal amount of $4.0 million to its founding investor and related party, Catalys Pacific Fund LP (Catalys), pursuant to a convertible notes agreement subsequently amended on December 20, 2020 (the Convertible Notes). The Company elected the fair value option to account for the Convertible Notes because the Company determined the fair value option provided users of the financial statements greater ability to estimate the outcome of future events as facts and circumstances change, particularly with respect to changes in the fair value of the stock underlying the conversion option and redemption feature. The Company used a guideline transaction method valuation model to estimate the fair value of the Convertible Notes, which relied on unobservable Level 3 inputs. Changes in the fair value of the Convertible Notes were recognized as expense as reported in change in fair value of convertible notes on the statement of operations for the year ended December 31, 2021. The carrying value of outstanding Convertible Notes as of December 31, 2020 approximated the estimated aggregate fair value as the embedded contingent put option is recognized at fair value and classified with the debt host. The put option allowed certain notes payable to be converted into stock, contingent upon completion of an equity financing transaction with gross proceeds above certain thresholds. The fair value estimate of the embedded put option was based on the probability-weighted discounted value of the put feature and represented a Level 3 measurement. Significant assumptions used to determine the fair value of the put feature include the estimated probability of exercise of the put option and the discount rate used to calculate fair value. The estimated probability of exercise was based on management’s expectation for future equity financing transactions. The discount rate was based on the weighted-average effective yield of notes previously issued by the Company, adjusted for changes in market yields of biotechnology sector CCC-rated debt. The preceding methods described may have produced a fair value calculation that may not have been indicative of net realizable value or reflective of future fair values. Although the Company believes its valuation methods were appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value could have resulted in a different fair value measurement at the reporting date. F-12 Mineralys Therapeutics, Inc. Notes to Financial Statements The following table sets forth a summary of changes in the fair value of the Convertible Notes, representing a recurring measurement that was reported as of December 31, 2020 within Level 3 of the fair value hierarchy. The following activity related to the Convertible Notes balance during the year ended December 31, 2021 (in thousands): Convertible Notes as of December 31, 2020 $ 4,500 Change in fair value 657 Accrued interest 27 Reclassification of Convertible Notes into convertible preferred stock (5,184) Convertible Notes as of December 31, 2021 $ — On February 16, 2021 (the Conversion Date), the Convertible Notes and accrued interest totaling $5.2 million were converted into 10,868,432 shares of Series A convertible preferred stock upon the closing of the Series A financing. As a result, on the Conversion Date, the Convertible Notes were reclassified to Series A convertible preferred stock, which is described in more detail in Note 6. “ Capital Stock .” Note 4. Commitments and Contingencies License Agreement with Mitsubishi Tanabe In July 2020, the Company entered into a license agreement (the Mitsubishi License) with Mitsubishi Tanabe, pursuant to which Mitsubishi Tanabe granted the Company an exclusive, worldwide, royalty-bearing, sublicensable license under Mitsubishi Tanabe’s patent and other intellectual property rights to exploit products incorporating lorundrostat (Lorundrostat Products) for the prevention, treatment, diagnosis, detection, monitoring, or predisposition testing with respect to indications, diseases, and conditions in humans. Pursuant to the Mitsubishi License, the Company paid Mitsubishi Tanabe a $1.0 million upfront fee, and the Company is obligated to pay Mitsubishi Tanabe development milestone payments of up to $9.0 million in the aggregate and commercial milestone payments of up to $155.0 million in the aggregate upon first commercial sale and upon meeting certain annual sales targets, as well as additional commercial milestone payments of up to $10.0 million for a second indication. Additionally, the Company is obligated to pay Mitsubishi Tanabe tiered royalties at percentages ranging from the mid-single-digits to ten percent (10%) of aggregate net sales of each Lorundrostat Product on a Lorundrostat Product-by-Lorundrostat Product and country-by-country basis, until the later of (i) the expiration of the last-to-expire valid Mitsubishi Tanabe patent claim covering a Lorundrostat Product, (ii) ten years from the first commercial sale of a Lorundrostat Product, or (iii) the expiration of regulatory exclusivity in such country. Such royalties are subject to reduction under specified conditions, including lack of patent coverage and generic competition. The Company is obligated to use commercially reasonable efforts to conduct and complete the development activities and to file for regulatory approval for at least one Lorundrostat Product in a major market country and consider in good faith to develop at least one Lorundrostat Product in a non-major market country. If the Company elects to sublicense its rights under the Mitsubishi License to a third party with respect to exploitation of lorundrostat or any Lorundrostat Product in certain countries in Asia, the Company has agreed to negotiate such a sublicense first, for a specified period of time, with Mitsubishi Tanabe, if Mitsubishi Tanabe notifies the Company that it would like to obtain such a sublicense. The Company agreed not to commercialize any competing product prior to three years following the first commercial sale of the first Lorundrostat Product in any country without Mitsubishi Tanabe’s prior consent. Unless terminated earlier, the Mitsubishi License will continue until the expiration of all of the Company’s royalty obligations to Mitsubishi Tanabe. The Company may terminate the Mitsubishi License for any or no reason upon 90 or 180 days’ prior written notice to Mitsubishi Tanabe depending on whether the Mitsubishi Tanabe Product has received regulatory approval. Mitsubishi Tanabe may terminate the Mitsubishi License if the Company has not initiated regulatory consultation for the first global clinical trials of lorundrostat in at least one major market country within a specified amount of time or if the Company or its affiliates or sublicensees initiate a challenge to the patent rights licensed to the Company by Mitsubishi Tanabe. In addition, either party may terminate the Mitsubishi License in the event of an uncured material breach by or bankruptcy of the other party, subject to certain notice and cure periods, or upon the other party’s bankruptcy or insolvency. For the year ended December 31, 2022 and 2021, the Company did not incur any research and development expenses related to the Mitsubishi License. F-13 Mineralys Therapeutics, Inc. Notes to Financial Statements Litigation Liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. From time to time, the Company may become involved in legal proceedings arising in the ordinary course of business. The Company was not subject to any material legal proceedings during the year ended December 31, 2022 and 2021, and no material legal proceedings are currently pending or threatened. Indemnification Agreements In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, business partners, and other parties with respect to certain matters including, but not limited to, losses arising from breach of such agreements or intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with officers of the Company and members of its board of directors that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is, in many cases, unlimited. To date, the Company has not incurred any material costs as a result of such indemnifications. The Company is not aware of any claims under indemnification arrangements, and it has not accrued any liabilities related to such obligations in its financial statements as of December 31, 2022 and 2021. Note 5. Accrued Liabilities Accrued liabilities consisted of the following (in thousands): December 31, 2022 2021 Research and development expenses $ 4,846 $ 3,636 Compensation and benefits 665 313 Professional fees and other 649 342 Total $ 6,160 $ 4,291 Note 6. Capital Stock As of December 31, 2022, the Company has reserved authorized shares of common stock, on an as-converted basis, for future issuance as follows: December 31, 2022 Series A Preferred Stock 7,995,191 Series B Preferred Stock 12,642,224 Common stock options outstanding 1,365,442 Awards available for grant under the 2020 Plan 291,432 Total 22,294,289 Amendment to the Articles of Incorporation On May 31, 2022, the Company’s Articles of Incorporation were amended and restated to increase the authorized shares of common stock, authorize the issuance of Series B convertible preferred stock, par value $0.0001 per share (Series B Preferred Stock) and modify the participation rights of the Series A convertible preferred stock, par value $0.0001 per F-14 Mineralys Therapeutics, Inc. Notes to Financial Statements share (Series A Preferred Stock). On May 31, 2022, the authorized shares of the Company’s classes of capital stock were modified to the following share amounts: Common stock 319,000,000 Series A Preferred Stock 86,332,216 Series B Preferred Stock 136,510,868 Total 541,843,084 Preferred Stock Offerings In February 2021, the Company entered into a Series A redeemable convertible preferred stock agreement (the Series A Purchase Agreement). From February 2021 to April 2021, the Company issued 50,311,827 shares of Series A Preferred Stock at $0.477 per share for net proceeds of $23.8 million. Additionally, in February 2021, the Convertible Notes and related accrued interest converted into 10,868,432 shares of Series A Preferred Stock, which is described in more detail in Note 3. “ Fair Value of Financial Instruments .” The Series A Purchase Agreement provided for an additional closing for the Series A purchasers for the issuance of up to 25,151,957 shares of Series A Preferred Stock, at a purchase price of $0.477 per share for aggregate cash proceeds of $12.0 million, upon the achievement of the Milestone (as defined in the Series A Purchase Agreement) or a waiver of the Milestone by the requisite holders. In January 2022, the Company achieved the Milestone under the Series A Purchase Agreement and sold an aggregate of 25,151,957 shares of Series A Preferred Stock under the Series A Purchase Agreement to certain existing investors, members of the Company’s board of directors and affiliates of members of its board of directors, at a purchase price of $0.477 per share for aggregate net proceeds of approximately $12.0 million. In June 2022, the Company entered into a Series B convertible preferred stock agreement with certain investors, including members of the Company’s board of directors and affiliates of members of its board of directors, pursuant to which the Company issued and sold to such investors an aggregate of 136,510,868 shares of Series B Preferred Stock at a purchase price of $0.8644 per share for aggregate net proceeds of approximately $117.7 million. The rights, preferences, and privileges of the Company’s Series A Preferred Stock as of December 31, 2022 are as follows: Voting The holders of Series A Preferred Stock are entitled to a number of votes equal to the number of whole shares of common stock into which the shares of Series A Preferred Stock are convertible. Except as provided by law or otherwise, the holders of the Series A Preferred Stock vote together with the holders of common stock as a single class. Holders of Series A Preferred Stock, voting as a separate class, are entitled to elect three members of the board of directors. Dividends Dividends are payable, if permitted by law, in accordance with the Series A Preferred Stock terms if and when declared by the board of directors. Holders of the Series A Preferred Stock are entitled to receive dividends out of any assets at the time legally available, at the applicable dividend rate specified for such shares of the Series A Preferred Stock. Dividends are not mandatory and are not cumulative. No dividends have been declared or paid since inception of the Company. Liquidation In the event of any voluntary or involuntary liquidation, dissolution, or winding up of the Company, the holders of shares of the Series A Preferred Stock then outstanding are entitled to be paid out of the assets of the Company available for distribution to its stockholders or, in the case of a deemed liquidation event, such as a merger or consolidation or the sale, lease, transfer, exclusive license, or other disposition of substantially all of the Company’s assets (collectively, a “Deemed Liquidation Event”), out of the consideration payable to stockholders in such an event, after payment of any liquidation preference of the Series B Preferred Stock and before any payment shall be made to the holders of common stock by reason of their ownership thereof, an amount per share equal to the Series A Preferred Stock original issue price, plus any dividends declared but unpaid. If upon any such liquidation, dissolution, or winding up of the Company or a Deemed Liquidation Event, the assets of the Company available for distribution to its stockholders are insufficient to pay the holders of shares of Series A Preferred Stock the full amount to which they are entitled, the holders of shares of the F-15 Mineralys Therapeutics, Inc. Notes to Financial Statements Series A Preferred Stock share ratably in any distribution of the assets available for distribution in proportion to the respective amounts that would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full. The remaining available proceeds will be distributed pro rata among the holders of the shares of the Series A Preferred Stock and common stock, based on the number of shares held by each such holder, treating for this purpose all such securities as if they had been converted to common stock pursuant to the applicable terms immediately prior to such liquidation, dissolution, or winding up of the Company. However, the aggregate amount to which the holders of the Series A Preferred Stock are entitled to shall not exceed $1.1925 per share. Conversion Each share of the Series A Preferred Stock is convertible, at the option of the holder thereof, at any time and from time to time, and without the payment of additional consideration by the holder thereof, into such number of fully paid and non-assessable shares of common stock as determined by dividing the Series A Preferred Stock original issue price by the Series A Preferred Stock conversion price in effect at the time of conversion, which as of December 31, 2022 was equal to the original issue price and, as a result of the Reverse Stock Split, was equal to $5.1506. The applicable conversion price is subject to future adjustments upon the occurrence of certain events. The Series A Preferred Stock automatically converts upon either (i) the closing of a qualified initial public offering of the Company’s common stock (subject to adjustment for any share split, combination or dividend or distribution payable) resulting in at least $75,000,000 in proceeds, net of underwriting discounts and commissions to the Company, or (ii) the election to convert the preferred shares by requisite holders of the Series A Preferred Stock and Series B Preferred Stock. The Company evaluated the Series A Preferred Stock and determined that it was considered an equity host under ASC 815. In making this determination, the Company’s analysis followed the whole instrument approach, which compares an individual feature against the entire Series A Preferred Stock instrument that includes that feature. The Company’s analysis was based on a consideration of the economic characteristics and risks of the Series A Preferred Stock. More specifically, the Company evaluated all of the stated and implied substantive terms and features, including (i) whether the Series A Preferred Stock included redemption features, (ii) how and when any redemption features could be exercised, (iii) whether the holders of the Series A Preferred Stock were entitled to dividends, (iv) the voting rights of the Series A Preferred Stock, and (v) the existence and nature of any conversion rights. The Company concluded that because the Series A Preferred Stock represented an equity host, the conversion feature included in the Series A Preferred Stock was clearly and closely related to the associated host instrument. Accordingly, the conversion feature was not considered an embedded derivative that requires bifurcation. Redemption The Series A Preferred Stock is redeemable upon a request by two-thirds of the requisite holders of the Company’s Series A Preferred Stock in the event of a Deemed Liquidation Event, if the Company does not effect a dissolution of the Company within 90 days after such Deemed Liquidation Event, payable at a price equal to the cash or the value of the property, rights, or securities to be paid or distributed to holders pursuant to such Deemed Liquidation Event. Any redemption is deemed to be remote as of December 31, 2022, and the fair value of Series A Preferred Stock is deemed to be the price paid by the Series A preferred stockholders. Due to this redemption option, Series A Preferred Stock is recorded in mezzanine equity and is subject to subsequent measurement under the guidance provided under ASC 480. Pursuant to ASC 480, the Company has elected to recognize changes in redemption value immediately. However, based on the nature of Series A Preferred Stock, no subsequent measurement will be recognized until a Deemed Liquidation Event becomes probable. As of December 31, 2022, a Deemed Liquidation Event was not probable; as a result, the Series A Preferred Stock is valued at original issue price, less cost of issuance. The rights, preferences, and privileges of the Company’s Series B Preferred Stock as of December 31, 2022 are as follows: Voting The holders of Series B Preferred Stock are entitled to a number of votes equal to the number of whole shares of common stock into which the shares of Series B Preferred Stock are convertible. Except as provided by law or otherwise, the holders of the Series B Preferred Stock vote together with the holders of common stock as a single class. Holders of Series B Preferred Stock, voting as a separate class, are entitled to elect two members of the board of directors. F-16 Mineralys Therapeutics, Inc. Notes to Financial Statements Dividends Dividends are payable, if permitted by law, in accordance with the Series B Preferred Stock terms if and when declared by the board of directors. Holders of the Series B Preferred Stock are entitled to receive dividends out of any assets at the time legally available, at the applicable dividend rate specified for such shares of the Series B Preferred Stock. Dividends are not mandatory and are not cumulative. No dividends have been declared or paid since inception of the Company. Liquidation In the event of any voluntary or involuntary liquidation, dissolution, or winding up of the Company, the holders of shares of the Series B Preferred Stock then outstanding are entitled to be paid out of the assets of the Company available for distribution to its stockholders or, in the case of a Deemed Liquidation Event, out of the consideration payable to stockholders in such an event, before any payment shall be made to the holders of Series A Preferred Stock or common stock by reason of their ownership thereof, an amount per share equal to the greater of (i) the Series B Preferred Stock original issue price, plus any dividends declared but unpaid, or (ii) such amount per share as would have been payable had all shares of Series B Stock been converted into common stock immediately prior to liquidation, dissolution, winding up, or Deemed Liquidation Event. If upon any such liquidation, dissolution, or winding up of the Company or a Deemed Liquidation Event, the assets of the Company available for distribution to its stockholders are insufficient to pay the holders of shares of Series B Preferred Stock the full amount to which they are entitled, the holders of shares of the Series B Preferred Stock share ratably in any distribution of the assets available for distribution in proportion to the respective amounts that would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full. Conversion Each share of the Series B Preferred Stock is convertible, at the option of the holder thereof, at any time and from time to time, and without the payment of additional consideration by the holder thereof, into such number of fully paid and non-assessable shares of common stock as determined by dividing the Series B Preferred Stock original issue price by the Series B Preferred Stock conversion price in effect at the time of conversion, which as of December 31, 2022 was equal to the original issue price and, as a result of the Reverse Stock Split, was equal to $9.3338. The applicable conversion price is subject to future adjustments upon the occurrence of certain events. The Series B Preferred Stock automatically converts upon either (i) the closing of a qualified initial public offering of the Company’s common stock (subject to adjustment for any share split, combination or dividend or distribution payable) resulting in at least $75,000,000 in proceeds, net of underwriting discounts and commissions to the Company, or (ii) the election to convert the preferred shares by requisite holders of the Series A Preferred Stock and Series B Preferred Stock. The Company evaluated the Series B Preferred Stock and determined that it was considered an equity host under ASC 815. In making this determination, the Company’s analysis followed the whole instrument approach, which compares an individual feature against the entire Series B Preferred Stock instrument that includes that feature. The Company’s analysis was based on a consideration of the economic characteristics and risks of the Series B Preferred Stock. More specifically, the Company evaluated all of the stated and implied substantive terms and features, including (i) whether the Series B Preferred Stock included redemption features, (ii) how and when any redemption features could be exercised, (iii) whether the holders of the Series B Preferred Stock were entitled to dividends, (iv) the voting rights of the Series B Preferred Stock, and (v) the existence and nature of any conversion rights. The Company concluded that because the Series B Preferred Stock represented an equity host, the conversion feature included in the Series B Preferred Stock was clearly and closely related to the associated host instrument. Accordingly, the conversion feature was not considered an embedded derivative that requires bifurcation. Redemption The holders of the Series B Preferred Stock have no rights to cause the redemption of their shares outside of a deemed liquidation event. A deemed liquidation event would constitute a redemption event that may be outside of the Company’s control. The Series B Preferred Stock is redeemable upon a request by two-thirds of the requisite holders of the Company’s Series B Preferred Stock in the event of a Deemed Liquidation Event, if the Company does not effect a dissolution of the Company within 90 days after such Deemed Liquidation Event, payable at a price equal to the cash or the value of the property, rights, or securities to be paid or distributed to holders pursuant to such Deemed Liquidation Event. F-17 Mineralys Therapeutics, Inc. Notes to Financial Statements Any redemption is deemed to be remote as of December 31, 2022, and the fair value of Series B Preferred Stock is deemed to be the price paid by the Series B preferred stockholders. Due to this redemption option, Series B Preferred Stock is recorded in mezzanine equity and is subject to subsequent measurement under the guidance provided under ASC 480. Pursuant to ASC 480, the Company has elected to recognize changes in redemption value immediately. However, based on the nature of Series B Preferred Stock, no subsequent measurement will be recognized until a Deemed Liquidation Event becomes probable. As of December 31, 2022, a Deemed Liquidation Event was not probable; as a result, the Series B Preferred Stock is valued at original issue price, less cost of issuance. Note 7. Stock-Based Compensation Equity Incentive Plan On July 7, 2020, the board of directors adopted, and the Company’s stockholders approved, the 2020 Equity Incentive Plan. The 2020 Equity Incentive Plan, as amended and restated (the 2020 Plan), provides for the grant of incentive stock options to employees of the Company, and for the grant of non-statutory stock options, restricted stock awards (RSAs), restricted stock unit awards, and other forms of stock awards to employees, directors, and consultants of the Company (collectively, “stock-based awards”). The board of directors or a designated committee of the board of directors is responsible for the administration of the 2020 Plan and determines the term, exercise price, and vesting terms of each award. Under the terms of existing awards, all stock option grants expire ten years from grant date. Options may not have an exercise price less than 100% of the fair market value of the Company’s common stock on the grant date, and generally vest over a period of four years. In June 2022, the board of directors adopted, and the Company’s stockholders approved, an amendment to the 2020 Plan to increase the authorized shares issuable to 3,445,626. Total stock-based compensation expense reported in the statements of operations was allocated as follows (in thousands): Year Ended December 31, 2022 2021 Research and development $ 200 $ 75 General and administrative 255 5 Total $ 455 $ 80 Stock Options As of December 31, 2022 and 2021, the Company had 3,445,626 and 1,744,700, respectively, shares of its common stock reserved under the 2020 Plan. As of December 31, 2022 and 2021, a total of 291,432 and 405,819, respectively, options were available for issuance under the 2020 Plan. The following is a summary of the Company’s stock option activity under its 2020 Plan: Shares Weighted-Average Exercise Price Total Intrinsic Value (in thousands) Weighted-Average Remaining Contractual Life (Years) Options outstanding as of December 31, 2020 — $ — $ — — Options granted 527,387 $ 0.67 Options outstanding as of December 31, 2021 527,387 $ 0.67 $ 105 9.4 Options granted 838,055 $ 1.18 Options outstanding as of December 31, 2022 1,365,442 $ 0.98 $ 15,561 9.1 Options vested and exercisable as of December 31, 2022 251,197 $ 0.67 $ 2,942 8.4 As of December 31, 2022, the Company had $1.8 million of unrecognized share-based compensation expense related to stock option awards that is expected to be recognized over a weighted-average period of approximately 3.2 years. F-18 Mineralys Therapeutics, Inc. Notes to Financial Statements For the years ended December 31, 2022 and 2021, the total fair value of options vested was$0.1 million and $18 thousand, respectively. The weighted-average grant date fair value per share for options granted during the years ended December 31, 2022 and 2021 was $2.12 and $0.49, respectively. The following table presents the weighted-average assumptions used in the Black-Scholes option pricing model to determine the fair value of stock options granted during the following periods: Year Ended December 31, 2022 2021 Exercise price $ 1.18 $ 0.67 Expected term (years) 6.07 6.08 Expected stock price volatility 92.2 % 87.0 % Risk-free rate of interest 3.0 % 1.1 % Expected dividend yield — % — % Restricted Stock Awards RSAs granted by the Company have varying vesting terms depending on the terms of the grant. Holders of unvested RSAs have the same rights as those of common stockholders including voting rights and non-forfeitable dividend rights. However, ownership of unvested RSAs cannot be transferred until vested. Upon a participant’s termination of continuous service for any reason, any shares subject to RSAs held by the participant that have not vested as of such termination date may be forfeited to or repurchased by the Company. The following is a summary of the Company’s RSA activity under its 2020 Plan: Shares Weighted-Average Grant Date Fair Value Unvested as of December 31, 2020 781,391 $ 0.0076 Granted 30,103 $ 0.5399 Vested (473,855) $ 0.0391 Unvested as of December 31, 2021 337,639 $ 0.0108 Granted 977,258 $ 1.7512 Vested (115,761) $ 0.0010 Unvested as of December 31, 2022 1,199,136 $ 1.4290 As of December 31, 2022, the Company had $1.5 million of unrecognized share-based compensation expense related to RSAs that is expected to be recognized over a weighted-average period of approximately 3.1 years. For the years ended December 31, 2022 and 2021, the total fair value of RSAs vested was $0.1 million and $19 thousand, respectively. F-19 Mineralys Therapeutics, Inc. Notes to Financial Statements Note 8. Income Taxes There was no current or deferred income tax expense or benefit for the years ended December 31, 2022 and 2021, due to the Company’s net loss and increases in its deferred tax asset valuation allowance. The components of the Company’s deferred tax assets are as follows (in thousands): December 31, 2022 2021 Net operating loss carryforwards $ 5,738 $ 4,460 Research and development credit carryforwards 1,357 520 Capitalized research and development costs 5,367 — Intangible assets 270 286 Other 183 83 Total deferred tax assets 12,915 5,349 Valuation allowance (12,915) (5,349) Deferred tax assets, net of valuation allowance $ — $ — The Company has established a valuation allowance against its net deferred tax assets due to the uncertainty surrounding the realization of such assets, which are dependent on future earnings, if any, the timing and amount of which are uncertain. The Company periodically evaluates the recoverability of the deferred tax assets. Valuation allowances are provided against deferred tax assets when, based on all available evidence, it is considered more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. When realization of the deferred tax asset is more likely than not to occur, the benefit related to the deductible temporary differences attributable to operations is recognized as a reduction of income tax expense. The Company’s valuation allowance increased by approximately $7.6 million and $4.6 million for the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022 and 2021, the Company had federal net operating loss (NOL) carryforwards of $25.7 million and $20.1 million available to reduce future taxable income, respectively. The federal NOL carryforward has no expiration as a result of the Tax Cuts and Jobs Act of 2017. As of December 31, 2022 and 2021, the Company had $5.3 million and $3.8 million, respectively, of state NOL carryforwards that begin expiring in 2041. As of December 31, 2022 and 2021, the Company had federal and state research and development tax credit carryforwards of $1.4 million and $0.5 million, respectively, to reduce future taxable income. The federal research and development tax credit carryforwards begin to expire in 2040. Research and development tax credit carryforwards associated with California carry forward indefinitely. Research and development tax credit carryforwards associated with other states begin expiring in 2036. The Internal Revenue Code (IRC) Sections 382 and 383 limit annual use of NOL and research and development credit carryforwards in the event a cumulative change in ownership of more than 50% occurs within a three-year period. The Company has not yet completed an ownership change analysis pursuant to IRC Section 382. If a requisite ownership change has occurred or occurs, the amount of remaining tax attribute carryforwards available to offset taxable income and income tax expense in future years may be restricted or eliminated. If eliminated, the related asset would be removed from deferred tax assets with a corresponding reduction in the valuation allowance. Due to the existence of the valuation allowance, limitations created by future ownership changes, if any, will not impact the Company’s effective tax rate. F-20 Mineralys Therapeutics, Inc. Notes to Financial Statements The Company’s effective tax rate for the years ended December 31, 2022 and 2021 was 0%. A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as follows for the years ended: December 31, 2022 2021 Statutory federal income tax rate 21.00 % 21.00 % State income taxes, net of federal tax benefits 1.69 1.26 Research and development credits 2.81 2.24 Permanent items and other (0.11) (0.73) Change in valuation allowance (25.39) (23.77) Total provision for income taxes — % — % The Company files income tax returns in the U.S. Federal jurisdiction and various state and local jurisdictions. As of December 31, 2022, all years remained subject to examination by tax authorities. Uncertain tax positions are evaluated based on the facts and circumstances that exist at each reporting period. Subsequent changes in judgment based upon new information may lead to changes in recognition, derecognition, and measurement. Adjustment may result, for example, upon resolution of an issue with the taxing authorities or expiration of a statute of limitations barring an assessment for an issue. The Company recognizes a tax benefit from an uncertain tax position when it is more-likely-than-not that it will be sustained upon examination by tax authorities. As of December 31, 2022 and 2021, the Company had $0.3 million and $0.1 million, respectively, in unrecognized tax benefits, which would not affect the effective tax rate if recognized. During the year ended December 31, 2022, the Company’s unrecognized tax benefits increased by approximately $0.1 million related to current year tax positions. The Company does not anticipate any significant changes in its unrecognized tax benefits over the next 12 months. The Company’s policy is to recognize interest expense and penalties related to income tax matters in income tax expense. As of December 31, 2022 and 2021, the Company had no accrued interest or penalties related to uncertain tax positions. The following table summarizes the changes to the Company’s unrecognized tax benefits for the years ended December 31, 2022 and 2021 (in thousands): Year Ended December 31, 2022 2021 Beginning balance $ 118 $ 13 Additions related to current year positions 143 105 Ending Balance $ 261 $ 118 Note 9. Subsequent Events Initial Public Offering On February 14, 2023, the Company completed an initial public offering (the IPO) of 13,800,000 shares of its common stock, which included the exercise in full by the underwriters of their option to purchase 1,800,000 additional shares, at a public offering price of $16.00 per share. The gross proceeds to the Company from the IPO were $220.8 million, before deducting underwriting discounts and commissions and offering expenses payable by the Company. In connection with the closing of the IPO, the Company’s board of directors approved an amendment to the Company’s amended and restated certificate of incorporation (the Restated Certificate). The Restated Certificate amended and restated the Company’s amended and restated certificate of incorporation, in its entirety to, among other things, increase the authorized number of shares of common stock to 500,000,000 shares and authorize 50,000,000 shares of undesignated preferred stock that may be issued from time to time by the Company’s board of directors in one or more series. F-21 Mineralys Therapeutics, Inc. Notes to Financial Statements Conversion of Series A and Series B Preferred Stock Immediately prior to the closing of the IPO, 86,332,216 shares of Series A Preferred Stock and 136,510,868 shares of Series B Preferred Stock converted into 20,637,415 shares of the Company’s common stock of which carrying value of Series A Preferred Stock and Series B Preferred Stock was converted to permanent equity. 2023 Incentive Award Plan In February 2023, the Company’s board of directors adopted and stockholders approved the 2023 Incentive Award Plan that became effective upon the closing of the IPO (2023 Plan), under which the Company may grant stock options, restricted stock, dividend equivalents, restricted stock units, stock appreciation rights, and other stock or cash-based awards to its employees, consultants, and directors. The number of shares of the Company’s common stock initially available for issuance under awards granted pursuant to the 2023 Plan was the sum of (i) 4,650,000 shares of the Company’s common stock, plus (ii) any shares subject to outstanding awards under the 2020 Plan as of the effective date of the 2023 Plan that become available for issuance under the 2023 Plan thereafter in accordance with its terms. The number of shares initially available for issuance will be increased on January 1 of each calendar year beginning in 2024 and ending in 2033, by an amount equal to the lesser of (i) 4% of the shares of the Company’s common stock outstanding on the final day of the immediately preceding calendar year and (ii) such smaller number of shares as determined by the Company’s board of directors. No more than 100,000,000 shares of the Company’s common stock may be issued upon the exercise of incentive stock options under the 2023 Plan. Shares issued under the 2023 Plan may be authorized but unissued shares, shares purchased on the open market, or treasury shares. In connection with the Company’s IPO, the Company’s board of directors approved the grant under the 2023 Plan of stock options to purchase an aggregate of 1,071,935 shares of its common stock to certain of the Company’s employees and directors, at an exercise price equal to the IPO price of $16.00. Upon the closing of the IPO, no additional awards will be granted under the 2020 Plan. However, the 2020 Plan will continue to govern the terms and conditions of the outstanding awards granted under it. Shares of the Company’s common stock subject to awards granted under the 2020 Plan that expire, lapse, or are terminated, exchanged for cash, surrendered, repurchased, or forfeited following the effective date of the 2020 Plan will be available for issuance under the 2023 Plan in accordance with its terms. 2023 Employee Stock Purchase Plan In February 2023, the Company’s board of directors and stockholders approved the 2023 Employee Stock Purchase Plan (ESPP), which became effective upon the closing of the Company’s IPO. The ESPP permits eligible employees who elect to participate in an offering under the ESPP to have up to a specified percentage of their eligible earnings withheld, subject to certain limitations, to purchase shares of common stock pursuant to the ESPP. A total of 400,000 shares of the Company’s common stock was initially reserved for issuance under the ESPP. The ESPP offering periods will commence when determined by a subcommittee of the board of directors and the offering period, offering price, and other terms will be determined subject to the terms of the ESPP. In addition, the number of shares available for issuance under the ESPP will be annually increased on January 1 of each calendar year beginning in 2024 and ending in and including 2033, by an amount equal to the lesser of (i) 1% of the shares outstanding on the final day of the immediately preceding calendar year and (ii) such smaller number of shares as is determined by the Company’s board of directors, provided that no more than 15,000,000 shares of the Company’s common stock may be issued under the ESPP. F-22 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures None.